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Common Concerns & Questions About Bankruptcy

Does personal bankruptcy affect eligibility for an FHA mortgage?

On Behalf of | Apr 30, 2015 | Personal Bankruptcy |

A major concern that many people in the Tyler area may have when they are planning to file for personal bankruptcy is how the filing will affect the debtor’s eligibility for loans and mortgages in the future. While it is true that a bankruptcy filing remains on a person’s record for 10 years, it does not necessarily affect the person’s eligibility for loans and mortgages as long as the person is able to rebuild and maintain healthy credit after obtaining the bankruptcy discharge.

For example, there are many people in Tyler who have a limited income and, therefore, will attempt to obtain a mortgage from the Federal Housing Administration. Those people should understand that neither a Chapter 7 nor a Chapter 13 bankruptcy filing disqualifies them from obtaining an FHA mortgage. However, the person applying for the insured loan must meet certain criteria before the FHA approves the loan.

In the event of a Chapter 7 bankruptcy filing, a person can apply for an FHA mortgage after two years from the date of discharge. FHA rules also require that at the end of those two years, the applicant must either have been able to rebuild the credit score or that applicant did not incur any new credit obligations. Additionally, the applicant must also be able to demonstrate, with documents, that they have responsibly managed their personal finances.

The FHA may approve a loan between 12 and 24 months from the date of discharge in certain exceptional cases. Those exceptions include bankruptcy filings where a debtor is able to prove that the bankruptcy occurred for unavoidable reasons and since the discharge, the person has been able to adequately manage all personal finances. Additionally, the lender must be convinced, again, with adequate documents, that the troublesome financial situation is unlikely to recur.

In the event of a Chapter 13 bankruptcy filing, an applicant is only eligible for an FHA mortgage after completing at least one year of debt repayment and the lender is convinced that the borrower’s repayment of the debts has been satisfactory in the past year. In addition to a satisfactory performance of debt repayment, an FHA mortgage applicant must also be cleared from the bankruptcy court before entering into a mortgage transaction with any lender.

Source: U.S. Department of Housing and Urban Development, “How does bankruptcy affect a borrower’s eligibility for an FHA mortgage?” Accessed on April 22, 2015